AT&T: Bulls Cheer Higher Sub View, Despite Margin Pressure

By Tiernan Ray

The Street today was pondering AT&T‘s (T) announcement last night, just before a meeting with sell-side research analysts, that it is seeing stronger subscriber growth in its “U-verse” high-speed Internet service and its television services than it had a year earlier, and that it expects to add half a million post-paid wireless subscribers this year, adding that its outlook for capital spending is for a “downward bias.”

Despite the upbeat news about subscriber additions, both bull and bear acknowledge there is increased pressure on AT&T’s profit margin from rising expenses, including promotions to lure those subscribers.

AT&T shares today fell 36cents, or 1%, to $35.45.

Nomura Equity Research‘s Mike McCormack, who has a Buy rating on AT&T shares, and a $38 price target, cut his EPS estimate this quarter to $2.45 form $2.50, writing that “While margin pressure is mounting, AT&T will continue to generate significant free cash flow.”

McCormack notes that subscriber additions were above his own 300,000 forecast. The higher adds are helped by tablet sales but also better handset additions.”

“We are also raising our postpaid upgrade rate from 6% to 7.25% for the iPhone trade-in offer.”

“In our view, T remains on track to meet guidance – despite concerns to the contrary,” she writes. “We continue to believe there are additional levers that the company has that the Street does not appreciate.”

Notes Fritzsche,

The prospect of an acquisition in Europe was the biggest topic of the evening and the company is clearly very interested in a potential opportunity. T reiterated its view that mobile broadband is in early stages in Europe and it would like to participate in mobile broadband growth through owning assets or extending products such as Digital Life. T noted that public policy issues are a concern but not insurmountable and that the biggest obstacle to a deal is finding the right asset and valuation.

On the other hand, William Power with R.W. Baird, who maintains a Neutral rating on shares of AT&T, writing that while the subscriber additions number is well above his forecast for 282,712, and above the year-earlier actual additions of 320,000, the impact will be to “drive down wireless and consolidated margins compared with our previous estimates,” with Ebitda margin expected at 43.2%, below his 45.9% estimate.

Some analysts noted the Apple (AAPL) implications of the update. AT&T didn’t specifically refer to Apple, but the Street takes note that a trade-in deal for older iPhone models appears to have contributed to the raised subscriber outlook.

Raymond James‘s Tavis McCourt, who has an Outperform rating on Apple shares, writes that with Apple typically having 80% share of smartphone activations at AT&T, the subscriber number seems to him a boost for Apple:

During the second quarter the company launched several successful promotions to drive customer additions, including a trade-in program which began on April 30 and offered discounts up to $200 off the price of a new smartphone with the trade in of an existing smartphone. This was likely in reaction to both Sprint and T-Mobile launching aggressive marketing promotions that all coincided around T-Mobile’s launch of the iPhone in April. This announcement also comes on the heels of news Apple is readying a trade-in program of its own hoping to encourage iPhone owners to trade in older models including the iPhone 4 and 4S to trade up to the iPhone 5 or the soon to be released 5S. Apple’s trade-in program will only be offered through its retail stores in partnership with Brightstar, which also handles AT&T and T-Mobile’s programs. Recycling used iPhones into emerging markets where the price of a new iPhone is typically out of reach for the majority of consumers helps Apple play defense against cheap Android devices. At the same time, this strategy exposes a new class of consumers to the Apple ecosystem, the stickiness of which is only growing as Apple pushes to expand services and its hardware portfolio.

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.